Deposit Assessment in Sri Lanka

8/6/2019 Deposit Assessment in Sri Lanka

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DEPOSITASSESSMENTIN SRI LANKA

INTERNATIONAL FINANCE CORPORATION & MicroSave | www.ifc.org | www.MicroSave.org | [email protected]

2011 INTERNATIONAL FINANCE CORPORATION

All rights reserved. May not be reproduced in whole or in part by any means without the writtenconsent of the International Finance Corporation (IFC). This information, while based on sources

that IFC considers to be reliable, is not guaranteed to be accurate and does not purport to be com-

plete.

This information shall not be construed, implicitly or explicitly, as containing any investment

recommendations, and, accordingly, IFC is not registered under the U.S. Investment Advisers Act

of 1940. This information does not constitute an offer of or on behalf of IFC to purchase or sell

any of the enterprises mentioned.

The denominations and geographical names in this publication are used solely for the conve-

nience of the reader and do not imply the expression of any opinion whatsoever on the part of

IFC, the World Bank, or other affiliates concerning the legal status of any country, territory, city,

area, or its authorities, or concerning the delimitation of its boundaries or national affiliation.

Any views expressed herein are those of the authors and do not necessarily represent the views

of the World Bank or IFC.

Commissioned by IFCs Access to Finance Advisory Department

Published in the United States of America, May 2011

MicroSave

MicroSave has over a decade of experience in providing practical, client-responsive, market-led

solutions to assist financial service providers and institutions working with low-income clients

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Ethiopia, Ghana, India, Indonesia, Kenya, Malawi, Nepal, Nigeria, the Philippines, Sierra Leone,South Africa, Sri Lanka, Sudan, Tanzania, Uganda and Vietnam.


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Table of ContentsList of Tables ii

List of Figures ii

Acknowledgments iii

Abbreviations iv

1. Background of The Study 1

2. Macroeconomic Environment 1

2.1 Trends in the Banking Sector 2

2.2 Demographics 3

2.3 Business Environment in Sri Lanka 7

3. Legal and Regulatory Framework 8

3.1 Institutions Accepting Deposits or Promoting Deposit-Linked Products 83.2 Formal Institutions for Deposit Mobilisation in Sri Lanka 10

3.3 Semi-Formal Institutions for Deposit Mobilisation in Sri Lanka 12

3.4 Informal Mechanisms for Deposit Mobilisation 17

3.5 Insurance Companies ` 17

3.6 The Role of Government of Sri Lanka in Deposit Mobilisation 18

3.7 Protecting the Customers: Consumer Protection Measures in Sri Lanka 20

3.8 Educating Customers: Financial Awareness /Literacy Campaigns 21

3.9 Payment Systems for Banks 21

3.10 Building Capacities of Institutions 22

4. Micro Deposit Service Providers, Products, Methodologies and their Scalability 22

4.1 Outreach of Financial Services 234.2 Formal Institutions 24

4.3 Semi-Formal Institutions 30

4.4 Informal Savings Mechanisms 34

4.5 Insurance 35

5. Understanding Clients Needs and Preferences 36

5.1 Outcomes of Case Studies 36

5.2 Expert Opinions 37

5.3 Use of Existing Savings Products 38

5.4 Reason for Saving 38

5.5 Seasonality of Saving 39

5.6 Client Priorities when Choosing Savings Mechanisms 39

5.7 Preference Ranking of Institutions (All Types) 40

6. Conclusion 43

6.1 The Way Ahead 44


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LIST OF FIGURESFigure 1: GDP Growth Rate (Annual %) 1

Figure 2: Per Capita GDP (at Current Prices in USD) 1

Figure 3: Savings and Investment Trend in Sri Lanka 2

Figure 4: Banks Deposit Mobilisation Trend 3

Figure 5: Gender and Population Growth 3

Figure 6: Rural Urban Population 4

Figure 7: Population Age Groups 4

Figure 8: Trends in Migration (No. of Persons) 5

Figure 9: Distribution of Workforce across Different Sectors 5Figure 10: Occupations in Sri Lanka 6

Figure 11: GDP Composition 6

Figure 12: Trend in Poverty Headcount Index 6

Figure 13: Distribution of Poverty across Provinces 7

Figure 14: Structure of Financial System in Sri Lanka (% of Total Assets) 8

Figure 15: Share of Deposits in Sri Lanka 10

Figure 16: Structure of SANASA 15

Figure 17: Outreach of Financial Services (% of Total Population) 23

Figure 18: Density of Bank Outlets 24

Figure 19: Households Per Bank Outlet 24

Figure 20: Savings Options and Their Usage 38Figure 21: Reasons for Savings 38

Figure 22: Importance Given to Attributes for Selecting SSP 40

Figure 23: Relative Preference Ranking on Product Design Attributes 43

Figure 24: Relative Preference Ranking on SSPs Institutional Characteristics 43

LIST OF TABLESTable 1: Macroeconomic Indicators Sri Lanka 1

Table 2: Currency, Inflation and Interest Rates Sri Lanka 2Table 3: Socio-economic Overview of Sri Lanka 2009 3

Table 4: Doing Business Rankings (June 2008- May 2009) 8

Table 5: Regulatory Framework for Deposit Taking Institutions in Sri Lanka 9

Table 6: Branches, Total Deposits and Share of Deposits for LCBs 25

Table 7: Branches, Total Deposits and Share of Deposits for LSBs 28

Table 8 : Branches, Total Deposits and Share of Deposits for NSB 28

Table 9: Branches, Total Deposits and Share of Deposits for Co-operatives 30

Table 10: Branches, Total Deposits and Share of Deposits for TCCSs 31

Table 11: Snapshot of SSPs preference on attributes 42


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ACKNOWLEDGMENTS

Deposit Assessment in Sri Lanka was written by Matthew Leonard, Jagdeep Dahiya, T.V.SRavi Kumar, Indrajith Wijesiriwardana, Chris Linder and Graham Wright. This report

is part of a wider study supported by the International Finance Corporation (IFC). The

Industry Mapping of Small Balance Deposits in South Asia (India, Nepal, Sri Lanka and

Bangladesh) is a comprehensive market study that details the needs and preferences of

micro-savings clients in South Asia and to support the development of client-responsive

products and delivery processes. IFC conceptualised, guided, and supported this study and

its wider dissemination. This study provides direction and enables financial institutions to

offer tailored products to low-income people. IFC and MicroSave would like to recognise

with deep appreciation, the financial support from the Netherlands Ministry of Foreign

Affairs for this study. Grant support from the Trust Fund enabled this study, that will

benefit vast numbers of financially underserved people worldwide.

This report is the result of the co-operation and hardwork of many people in many

organisations, especially the microfinance institutions, community-based organisations,

banks, donor agencies and industry experts who were a part of this study. MicroSave is

also grateful to the sector experts who gave their time and support to the study. Above all,

we thank the clients who patiently gave us their time during the extensive market research

for the report. Their responses regarding savings products and services, and how they

manage their finances without many options provided invaluable insight.

We hope and believe that the future for financial inclusion is bright, and that this report

will play a role in forming the overall direction, products, and the delivery channels for

broadening and deepening the outreach of formal financial systems.

MicroSave Team


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ABBREVIATIONS

IFC International Finance Corporation

A2F Access to Finance

CBSL Central Bank of Sri Lanka

IMF International Monetary Fund

GDP Gross Domestic Product

GNI Gross National Income

USD United States Dollar

LKR Lankan Rupees

HDI Human Development Index

OECD Organisation for Economic Co-operation and Development

HCI Head Count IndexLCBs Licensed Commercial Banks

LSBs Licensed Specialised Banks

RFCs Registered Finance Companies

CRBs Co-operative Rural Banks

RRDBs Regional Rural Development Banks

RDBs Regional Development Banks

MPCSs Multi-purpose Co-operative Societies

TCCSs Thrift and Credit Co-operative Societies

PTCCSs Primary Thrift and Credit Co-operative Societies

WDCs Womens Development Co-operative Societies

RoSCAs Rotating Savings and Credit Associations

ASCAs Accumulating Savings and Credit Associations

CBOs Community Based Organisations

NGO Non-Governmental Organisations

MFIs Microfinance Institutions

SBSs Samurdhi Bank Societies

IBSL Insurance Board of Sri Lanka

NDTF National Development Trust Fund

JTF Janasaviya Trust FundPAMP Poverty Alleviation Microfinance Project

JBIC Japan Bank of International Corporation

HNB Hatton National Bank

NSB National Savings Bank

FD Fixed Deposit

GTZ The Deutsche Gesellschaft fr Technische Zusammenarbeit


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1. BACKGROUND OF THE STUDYIFCs Access to Finance (A2F) department caters to both policy- and project-related

advisory work on financial markets, financial institutions and financial infrastructure.Microfinance is a core product of A2F and expanding small-scale deposits is a flagship

initiative. Microfinance is well-established in South Asia, with numerous large, successful,

and internationally known institutions in Bangladesh, India, Nepal and Sri Lanka. For a

variety of reasons, however, most institutions focus on microcredit and the development

of savings services has lagged seriously behind. This paper studies the current supply and

demand for microdeposit services in Sri Lanka.

2. MACROECONOMIC ENVIRONMENT1

The Sri Lankan economy can best be described as resilient. After the introduction of

liberalised economic policies in 1977, the country witnessed a bloody conflict which

ended in 2009, a bankruptcy crisis in 2001, a devastating natural disaster in 2005 and a

global economic meltdown in 2008. However, in spite of these detrimental factors, theeconomy has grown at an impressive average year-on-year rate of 4.88% from 1977 to

2009. Sri Lanka has only witnessed negative growth once after independence, due to the

global economic slowdown and the pressures of the sustaining conflict in 2001.

Table 1: Macroeconomic Indicators Sri Lanka

Macroeconomic Indicators 2005 2006 2007 2008 2009

GDP (at Current prices) in LKR Mn

(USD Mn)

2,452,782

(21,706)

2,938,680

(26,006)

3,578,688

(31,670)

4,410,682

(39,033)

4,825,085

(42,700)

GDP Growth (%)2

6.2 7.7 6.8 6.0 3.5Net Public Debt (as % of GDP) 90.6 88.7 85.8 90.0 N/A

National Savings Rate (as a % of GDP) 23.8 22.3 23.3 18.2 23.3

Domestic Savings Rate (as a % of GDP) 17.9 17.0 17.6 13.9 18.0

Investment (as % of GDP) 26.8 28.0 28.0 27.6 24.5

Source: Central Bank of Sri Lanka Publication E&SS-20102

1 All macroeconomic data in this section has been sourced from the Central Bank of Sri Lanka.

2 For 2008 and 09 from http://www.indexmundi.com/sri_lanka/gdp_real_growth_rate.html

-4%

-2%

0%

2%

4%

6%

8%

10%

1977 1988 1991 1994 1997 2000 2003 2006 2009

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

USD

2001 2008

Figure 1: GDP Growth (Annual %)Figure 2: Per Capita GDP

(at Current Prices in USD)


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In the second half of the past decade, the Sri Lankan economy grew at an average

of 6.04% before the global economic crisis, which pulled the growth rate to 3.5%

for 2009. The per capita GDP of Sri Lanka, at USD 2,053 in 2009, is the second

highest in the South Asia. (See Figure 2). Growth in per capita GDP during the

last decade was 139%, much higher than most of its neighbours. In January 2010,

Sri Lankas status was upgraded from a low-income country to a lower middle

income country by the IMF.3

Figure 3 below shows the trend in savings and investment in the Sri Lankan economy

from 2003-09. In 2008, the national savings rate did decline to below 20% of the

GDP, but readily rose to previous levels (23.3%) in 2009. The savings-investment

gap that grew from 2004 to 2008 owing to the development work undertaken post

the 2004 tsunami and the 2008 global slowdown, was covered by deficit financing.

2.1 TRENDS IN THE BANKING SECTOR

High growth rates during the last decade also contributed to a period of high

inflation. (See Table 2) After 2004, the country experienced double digit inflation

for five consecutive years. This led to a significant increase in the rates set by

the Central Bank of Sri Lanka with a peak in 2008 when the average bank prime

lending rate was 18.5%. Though the monetary measures adversely affected the GDP

growth, which fell to 3.5% in 2009, they did help rein in inflation to 3.4% by 2009.

Table 2: Currency, Inflation and Interest Rates - Sri Lanka

Macroeconomic Indicators 2005 2006 2007 2008 2009

Currency Stability (LKR USD

exchange rate)

100.5 103.9 110.6 108.3 114.9

Inflation (%) 11.0 10.0 15.8 22.6 3.4

Treasury Bill Yield Rate (91 days) (%) 10.1 12.8 21.3 17.3 7.7

Commercial Banks Average Weighted

Prime Lending Rate (%)

12.2 15.2 17.9 18.5 10.9

Commercial Banks Average Weighted

Deposit Rate (AWDR) (%)

6.2 7.6 10.3 11.6 8.0

Source: Central Bank of Sri Lanka Publication E&SS-20103 http://www.lankabusinessonline.com/fullstory.php?nid=1923230628

-20

-10

0

10

20

30

2003 2004 2005 2006 2007 2008 2009

Investment Domestic Savings National Savings Savings-Investment Gap

It took Sri Lanka more than

50 years to achieve a per capita income of

USD 1,020. Reaching a per capita income

of USD 4,000 by 2016 will be a feasible

target with the encouraging economic

environment.

- Mr. Mahinda Rajapaksa

President of Sri Lanka

Figure 3: Savings and Investment Trend in Sri Lanka


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As seen inFigure 4, during the last decade, licensed commercial banks

(LCBs) mobilised savings far more rapidly than the licensed specialised

banks (LSBs). There are several reasons for the success of LCBs over

LSBs, like the number of outlets growing from 1,084 in 2000 to 2,214in 2009 (versus LSB branches increasing from 305 to 504 over the same

period). Other factors include the robust financial infrastructure and

differences in regulations whereby commercial banks can provide more

services, as discussed in section 3.1.

2.2 DEMOGRAPHICS

Sri Lanka has a population of over 20 million people, composed of ethnic

Sinhalese (74%), Sri Lankan Tamils (12%) and Indian Tamils (6%).

These three communities represent 92% of Sri Lankas population.4

Seventy per cent of Sri Lankas population is of the Buddhist faith,5 while

Hindus represent 15%, Christians 8% and Muslims 7%. Over half of thepopulation is concentrated in small areas of the western, central and

southern provinces, constituting only 23.2% of Sri Lankas total land

area.6

Figure 5 shows that the population growth rate slowed in the last

decade to 1.2%. Yet, the population increased from 18 million in 2001

to over 20 million in 2009. Sri Lankas gender ratio favours women

and more has changed significantly in the past 50 years from 897

females for every 1,000 males in 1953 to 1,025 females for every

1,000 males in 2009. Like most South Asian countries, Sri Lanka is

also densely populated at 326 persons per km and ranks 35th

in theworld in terms of population density. Population density is highest

in western Sri Lanka, especially in and around the capital, Colombo.

Though Sri Lanka ranks in the lower half on the Human Development

Index (HDI), at 102 out of 180 countries (see Table 3), the average life

expectancy at birth has improved to over 75 years and the average literacy

rate is 91.3%.

Table 3: Socio-Economic Overview of Sri Lanka 2009

Population (000) (mid-year) 20,450

Density of population (Persons per square km) 326

Average Household Size 4.1Life Expectancy at Birth (years) 75.1

Average Literacy Rate (%) 91.3

Human Development Index (Rank )* 0.759 (102)

Poverty Head Count Index 15.2

Unemployment Rate(% ) 5.8

*Figures are for 2007

Source: Central Bank of Sri Lanka Publication: Key Social Indicators 2009.

4 http://news.bbc.co.uk/2/hi/south_asia/514577.stm

5 http://www.apcdfoundation.org/countryprofile/sri%20lanka/sri_lanka_intro.html

6 WHO Country Cooperation Strategy 2006-2011 Ch2,Pg 6: http://www.searo.who.int/LinkFiles/WHO_Country_Cooperation_Strategy_- _Sri_Lanka_Health_Development_Challenges.pdf

0

500

1,000

1,500

2,000

1998 2001 2004 2007 Q3-09

LKRBillion

LCBs LSBs

Source: Central Bank of Sri Lanka Publication

E&SS-2010

0

5

10

15

20

25

1953 1963 1971 1981 2001 2009

Population(inMillions)

Population Male Female

Source: http://www.statistics.gov.lk/page.asp?

page=Population%20and%20Housing

Figure 4: Banks Deposit Mobilisation Trend

Figure 5: Gender and Population Growth


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Even in in 2010, Sri Lanka remains a predominantly rural economy with 84.9% of its

population living in rural areas, including those involved in the estate sector, i.e., people

who work on large, corporate plantations, such as tea, rubber, etc. Migration from ruralto urban areas has grown after independence but in view of the countrys total population,

the rate remains low (as seen inFigure 6.

In the last decade, Sri Lankas population has slowly become older, partially due to

reasonably strong and sustained economic development, factors often related to a

reduction in fertility and a rise in life expectancy (as seen in Figure 7). The percentage of

senior citizens in Sri Lankas population was 9.2% in 2000 and 11.2% in 2006, exceeding

the average of all regions in the world except OECD countries, Eastern Europe and the

former Soviet Union.

Driven by a declining fertility rate and increasing life expectancy, population projections

indicate that the proportion of those aged 60 years or more will reach almost 20% ofthe total population by 2025 and 30% by 2050.7 This demographic change will have an

adverse impact on the Sri Lankan economy. However, the projection also underlines the

importance of offering appropriate financial products and services, including savings and

pensions, for all segments of the population.

2.2.1 MIGRATIONFIGURESAND TRENDS

The graph inFigure 8 (below) shows that a growing number of Sri Lankans are migrating

to other countries. The number of people migrating out of the country increased

substantially between 1995 and 2000, at a time when the political disturbance was at its

peak. More recently, there has been a trend among workers to migrate to the Middle East

for

7 Report No.43396-LK Sri Lanka Addressing the Needs of an Aging Population, World Bank, Retrieved from: siteresources.

worldbank.org/INTSRILANKA/.../LKAgingFullRep.pdf

0%

10%

20%

30%

40%

50%

60%70%

80%

90%

100%

Ages 15-64 (% of total)Ages 0-14 (% of total)

Ages 65 and above (% of total)

- 5,000 10,000 15,000 20,000

1950

1960

1970

1980

1990

2000

2010

Rural Urban

Figure 6: Rural Urban Population Figure 7: Population Age Groups


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employment. It is estimated that there are about 1.5 million Sri Lankans working

abroad, sending home more than $2.9 billion a year. In 2009, foreign employment as

a percentage of total work force was 24.2%, of which more than 51% were women.8

2.2.2 EMPLOYMENTFIGURESAND TRENDS

The labour force of Sri Lanka was 8.29 million in 2008 with an unemployment rate of

5.8%, which has decreased over the past decade due to the strong economic growth.

According to the estimates made available by the Central Bank of Sri Lanka in its Sri

Lanka Socio Economic Data-2008, the country had a total workforce of 7.4 million, out

which 94.2% were employed. Despite a large number of people (32.6%) employed in

the agriculture sector, as seen inFigure 9, its contribution to the total GDP stood at 12%.

The services sector, including tourism, hotels and financial and business services, is the

largest contributor to the national GDP of Sri Lanka with a share of 59.3%. 9, 10 What is

most interesting in this trend is that though over 80% of the population lives in rural areas,

only 46.8% of them work in agriculture and allied services. This means that a significantportion of the rural population is involved in the kind of jobs which are often reserved for

urban areas, such as services and manufacturing, etc., as seen inFigure 10.

8 Sri Lanka Bureau of Foreign Employment

9 Sri Lanka Socio-Economic Data 2008, Central Bank of Sri Lanka, June, 2008

10 Figures pertain to the year 2007

1970

1975

1980

1985

1990

1995

2000

2005

-38,500

-145,000

-237,500

-395,500

-137,440

-255,780

-400,002

-441,764

32.60

25.10

42.30

12

28.6

59.3

0%

10%

20%

30%

40%

50%

60%

70%

Agriculture Industry Services

% of Workforce Employed

% Contribution to GDP

Source: http://data.worldbank.org/country/sri-lanka Source: www.statistics.lksri-lanka

Figure 8: Trends in Migration

(No. of Persons)

Figure 9: Distribution of Workforce across

Different Sectors


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Figure 11 shows how Sri Lankas GDP has grown over the

last decade. The services sector has shown consistently strong

growth from 53.1% in 2001 to 59.3% in 2009, due to growth

in tourism and transportation industries. Industrys contribution

relatively remained the same with a marginal increase from

26.8% to 28.6%, and agriculture declined from 20.1% in 2001

to 12% in the GDP of 2009. 11

2.2.3 POVERTYTRENDSAND FIGURES

The population living below the National Poverty Line was

officially 15.2% in 2007, halving from almost 30% in the mid-

nineties (the World Bank estimates poverty to be 34%, based on

the $2/day level).This improvement can be primarily attributed

to the 36% reduction in the rural sectors poverty levels from

24.7% to 15.7% (80% of Sri Lankas population resides in rural

areas). (See Figure 12).

However, poverty in the estate sector, which constitutes 5.5% of

the total population, touched a new high as the population living

below the poverty line jumped from 30% in 2002 to 32% in

2007. The urban sector had the lowest poverty rate with a Head

Count Index (HCI) of 6.7% (only 6.6% of overall poverty).

Among the different provinces (refer to Figure 13), the Uva and

Sabaragamuwa provinces are the poorest with HCIs of 27% and

24%, respectively12. The western province is the richest with an

HCI of 8.2%, but accounts for 16.8% of the poor, as it represents

11 Central Bank of Sri Lankas publication E&SS 2010

12 Poverty Head Count Index survey was not conducted in the northern province and a large part of the eastern province due to theconflict. These provinces are considered to be more poor

0%

10%

20%

30%

40%

50%

1990-91 1995-96 2002-03 2006-07

Sri Lanka Urban Rural Estate

Source: http://www.statistics.gov.lk/poverty/index.htm

46.80%

13.30%

3.90%

9.60%

4.10%

1.30%15.70%

2.20%3.20%

Agriculture

Manufacturing

Construction

Trade and Hotels

Transport, Storage

and Communication

Insurance, Real Estate

&Business Services

Services

Others

Unidentified

0

1,000

2,000

3,000

4,000

5,0006,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

Services Industry Agriculture

Source: http://www.statistics.gov.lk/samplesurvey/index.htm


Figure 10: Occupations in Sri Lanka Figure 11: GDP Composition

Figure 12: Trend in Poverty Headcount Index


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20% of the total population. Colombo is the richest district in the country with a poverty

headcount ratio of only 5%. The Nuwara Eliya District has the highest poverty headcount

ratio of 34%, followed by Monaragala District at 33%, both of these are located in central

parts of the country.

2.3 BUSINESS ENVIRONMENT IN SRI LANKA

Sri Lanka began opening its economy in the late 1970s with a focus on promoting the

private sector. The following policies and procedures are conducive for attracting foreign

direct investment:

Total foreign ownership is allowed in almost all parts of the country.

The safety of foreign investment is guaranteed by the Constitution.

The legal and regulatory framework covers intellectual property law; settlement of

disputes and other laws define the policies for foreign investors ensuring ease and

transparency in operations.

Equal treatment for foreign and local investors under the investment and general

laws of the country.

Sri Lanka ranks 105 out of 183 countries in the overall ranking of ease of doing

business. In South Asia, Pakistan is ranked first, followed by the Maldives and Sri

Lanka is ranked third. Sri Lanka ranks 41 in the ease of starting a business, while it is

166th when it comes to paying taxes (see Table 4 below). Sri Lanka scores the lowest

in terms of dealing with construction permits and time taken for registering property,

ranking 168 and 148, respectively. Starting and closing a business in Sri Lanka is

relatively easy and one needs to only follow 4 procedures, compared to the South Asian

0%

5%

10%

15%

20%

25%

30%

Poverty Head

Count Index

Percentage of Total Population Percentage Contribution to Poverty

Source: http://www.statistics.gov.lk/poverty/index.htm

Figure 13: Distribution of Poverty Across Provinces


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average of 7.3. In terms of financial services, Sri Lanka does fairly well71st with getting

credit and 73rd for protecting investorsalthough this is much lower than India and

Bangladesh, which rank 30th & 41st and 71st & 20th, in both categories.

Table 4: Doing Business Rankings (June 2008- May 2009)

Economy Ease of Doing

Business

Starting a

Business

Employing

Workers

Registering

Property

Getting

Credit

Protecting

Investors

Paying

Taxes

Enforcing

Contracts

Closing a

Business

Sri Lanka 105 41 96 148 71 73 166 137 45

Bangladesh 119 98 124 176 71 20 89 180 108

Nepal 123 87 148 26 113 73 124 122 105

India 133 169 104 93 30 41 169 182 138

Source: http://www.doingbusiness.org/ExploreEconomies/?economyid=174

3. LEGAL AND REGULATORY FRAMEWORK

3.1 INSTITUTIONS ACCEPTING DEPOSITS OR PROMOTING DEPOSIT-LINKED

PRODUCTS

The apex institution in the banking sector in Sri Lanka is the Central Bank of Sri Lanka

(CBSL), which is responsible for the governance of banks and the financial sector.

The Sri Lankan financial system consists of institutions, such as licensed commercial banks

(LCBs), licensed specialised banks (LSBs), registered finance companies (RFCs), specialised

leasing companies (SLCs), insurance companies, co-operative rural banks (CRBs), major

financial markets (such as the foreign exchange market, money and capital markets), and the

payment and settlement systems.Figure 14 shows the percentage of total financial assets is

split between various players in the formal financial system of Sri Lanka. LCBs dominate

the financial sector, holding 45% of the total assets, and LSBs and RFCs hold 9% and 3%,

respectively.

Central Bank of SriLanka 15%

Licensed Commercial

Banks 45%

Licensed Specialised

Bank 9%

Registered Finance

Companies 3%

Employees' Provident

Fund 14%

Primary Dealers 2%

Specialised Leasing

Companies 2%

Rural Banks

2%

Employees Trust Fund

2%

Private

ProvidentFunds 2%

Insurance Companies

3%

Others

2%

Source: http://www.cbsl.gov.lk/htm/english/05_fss/fss.html

Figure 14: Structure of Financial System in Sri Lanka (% of Total Assets)


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In addition, there are also semi-formal institutions, like thrift and credit co-operative

societies (TCCS) and informal mechanisms, like rotating savings and credit

associations (RoSCAs), commonly known as Seettus, through which the poor alsoaccess financial services. For the purpose of this study, the service providers are

grouped into 1) formal, 2) semi-formal and 3) informal institutions, based on the type

of regulation by which they are governed. Table 5 below shows the various types

of institutions and the laws under which the service providers are regulated.13141516

Table 5: Regulatory Framework for Deposit Taking Institutions in Sri Lanka

Type of Institution Regulating Authority Governing Law/Act Number of Entities

Formal Institutions for Deposit Mobilisation

Licensed

Commercial Banks

(LCBs)

Central Bank, Ministry

of Finance

The Banking Act 1988 Public sector 2

Local Banks 9

Foreign 12

Licensed

Specialised Banks

(LSBs)

Central Bank, Ministry

of Finance

The Banking Act 1988 Regional

Development Banks

(RDB)-613

, Others 9

Registered Finance

Companies (RFCs)

Central Bank,

(Department of

Supervision of Non-

Bank Financial

Institutions)

The Finance Companies Act

1982

36

Insurance

Companies

The Insurance Board of

Sri Lanka (IBSL)

The Regulation of Insurance

Industry Act 2000

16

Semi Formal Institutions for Deposit Mobilisation

Co-operative Rural

Banks (CRBs)

Department of Co-

operative Development

Co-operative Societies Law

1992

1,805 CRBs.14

Operated through 305

MPCSs15

Thrift and Credit

Co-operative

Societies (TCCS)

Sanasa

Department of Co-

operative Development

Societies Ordinance 8,440 societies (of

which only 1/3rd

are

active)16

NGO-MFIs Ministry of Social

Services

Voluntary Social

Service Organisations Act No.

31 of 1980, amended byAct No. 8 of 1998

Companies Act -1982

2,993 Outlets/

Branches17

Samurdhi Societies* Monetary Board Samurdhi Authority Act

1995 (as amended)

1,038 Samurdhi

Bank Societies18

*The central bank does not include the deposits of NGOs and Samurdhi while calculating total

deposits.

13 http://www.coop.gov.lk/info_English/index.asp-xp=924&xi=932.htm

14 Total number of societies registered in 2007 (Microfinance Institut ions in Sri Lanka - GTZ study 2009)

15 Number of NGO-MFIs outlets (as per Microfinance Institutions in Sri Lanka - GTZ study 2009)

16 Number of registered SBSs in 2001 (as per Microfinance Institutions in Sri Lanka- GTZ study 2009)


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3.2 FORMAL INSTITUTIONS FOR DEPOSIT MOBILISATION

IN SRI LANKA

Formal institutions include banks (both LCBs and LSBs) and financecompanies (RFCs), which mobilise over 95% of total deposits in Sri

Lanka (See Figure 15). Formal institutions govern the market because

of the wide outreach, government mandate and their long existence.

(The Central Bank does not include the savings mobilised from NGO-

MFIs and Samurdhi societies and other informal mechanisms when

calculating total deposits).

3.2.1 BANKS

The regulatory and supervisory framework of the banks in Sri Lanka

is guided by the Banking Act, Monetary Law Act and the ExchangeControl Act.17

The Banking Act provides that no banking business shall be carried

out except by a public company under the authority of a license issued by the Monetary

Board of the Central Bank of Sri Lanka and with the approval of the Minister of Finance.

The Central Bank issues licenses of two types, i.e. for LCBs and LSBs. The licensing

requirement does not apply to registered finance companies under the Finance Companies

Act, a co-operative society under the Co-operative Societies Law, a building society

incorporated under the National Housing Act or any non-profit organisation established or

registered under any written law which accepts deposits only from its registered members

and has obtained permission in writing from the Monetary Board.

The countrys formal financial system comprises of 23LCBs, 15 LSBs18 and 32 RFCs.

(i) Licensed Commercial Bank (LCBs)

Under the Banking Act, a public company can act as a commercial bank and carry out

banking activities only if it obtains a banking license19 by meeting minimum capital

requirements and getting an approval license issued by the Monetary Board of Central

Bank of Sri Lanka, under Part IXA of the Banking Act. The minimum paid-up capital for

local and foreign LCBs is LKR 2.5 billion (approximately USD 22 million).20

Foreign LCBs in Sri Lanka operate as branches of their parent bodies as opposed to

being separate legal entities; consequently, such branches maintain capital in the form ofassigned capital from the parent body and are required to maintain additional deposits as

specified by the Monetary Board.21

17 http://www.cbsl.gov.lk/htm/english/05_fss/f_2.html

18 After the merger of the RDBs there are now 10 LSBs in Sri Lanka.

19 Section 2(1) of the Banking Act

20 http://www.cbsl.gov.lk/pics_n_docs/09_lr/_docs/licensing/bsd_licensing.pdf

21 http://www.cgap.org/gm/document-1.9.45846/Country%20Report_Sri%20Lanka%20Prudential%20Regulations.pdf

Source: http://www.cbsl.gov.lk/htm/english/05_fss/fss.html

Figure 15: Share of Deposits in Sri Lanka


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LCBs can carry out the following activities as authorised and specified in its banking

license under the Banking Act:22

(i) Opening, maintaining and managing deposits, savings and other similar accounts,

including current accounts;

(ii) Borrowing, raising or taking up money;

(iii) Negotiating loans and advances;

(iv) Lending or advancing money, with or without security; and

(v) Any other activities incidental to the banking business (if authorised under the

license).

(ii) Licensed Specialised Banks (LSBs)

LSBs are specially licensed banks for savings and development. The licensing requirements

are similar to those of LCBs. The minimum paid-up capital for LSBs is presently LKR

2 billion (approximately USD 17.7 million). The main activities LSBs are allowed to

undertake are contained in the Fourth Schedule of the Banking Act, and they include:23

(i) Accepting time and savings deposits, and opening, maintaining and managing

deposits, savings and other similar accounts (excluding conducting banking

business, as defined in the Banking Act, see sidebar).

(ii) Granting loans and advances or participating with other financial institutions ingranting loans or advances to any enterprise.

Since LSBs are licensed for special purposes, the basic services an LSB may carry out are

individualised and specific to the institution and authorised in its license. The LSBs may

also be restricted from undertaking certain activities as per the license or other written

law. LSBs are restricted from operating current accounts for their clients and from dealing

in foreign currency and commodities such as gold.

In September 2010, the CBSL issued a press release which required LCBs and LSBs

to increase their capital requirements. As per the press release, LCBs must have

minimum capital of LKR 3 billion (USD 25.5 million approximately) by March 2011

and LKR 5 billion (USD 44.2 million approximately) by March 2015. LSBs must

have minimum capital of LKR 2 billion (USD 17.7 million approximately) by 2011

and LKR 3 billion (USD 25.5 million approximately) by 2015. Increased capital will

further provide a cushion for banks to enhance their contribution to the new growth

sectors of the economy and to absorb any unexpected losses, the CBSL stated.24

The CBSLs focus in light of the collapse of the Golden Key credit card company, has

been to strengthen the banking system by increasing capital requirements so as to mitigate

risks better.

22 http://www.microfinance.lk/pdf/1260785911.pdf


24 Press release dated 07/09/2010, retrieved from: www.cbsl.gov.lk

Banking business is defined

in the Banking Act as the business of

receiving funds from the public through

the acceptance of money deposits payable

upon demand by cheque, draft, order or

otherwise and the use of such funds either

in whole or in part for advances, invest-

ments or any other operation either

authorised by law or by customary

banking practices.

--As defined in the Banking Act

Licensed specialised banks

(LSBs) differ from LCBs in that they are

prohibited from opening and maintaining

current (or checking) accounts for its

customers. The ability to deal in gold and

foreign currency, available to LCBs (all of

which have been appointed by Central

Bank as authorised dealers in foreign

currency) is also not available to LSBs.

www.microfinance.lk/pdf/1260785911.pdf


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3.2.2 REGISTERED FINANCECOMPANIES (RFCS)

The Finance Companies Act governs the regulation and supervision of RFCs. The

Department of Supervision of Non-Bank Financial Institutions of the Central Bank

carries out the regulatory and supervisory functions for RFCs and ensures they comply

with the minimum prudential requirements stipulated by the Central Bank. The directions

and rules issued under the provision of the Finance Companies Act cover minimum

capital adequacy and liquidity requirements, deposits, provisioning for bad and doubtful

debts, single borrower limits and limits on equity investments. Matters relating to non-

compliance with prudential requirements or any weaknesses and deficiencies in the

financial condition, controls and systems of a finance company are brought to the notice

of its Board of Directors by the Central Bank to ensure that corrective action is taken

by the company. Finance companies are required to maintain core capital of LKR 200

million (USD 1.76 Million).

In a Nutshell

From a regulatory perspective, the commercial and specialised banks and registered

finance companies are the most highly regulated entities in the Sri Lankan financial

sector. The governing Acts for these institutions have been in existence for many years

and have been improved and fine-tuned by various amendments, thereby establishing a

well-defined set of guidelines for regulating and supervising the institutions.

3.3 SEMI-FORMAL INSTITUTIONS FOR DEPOSIT MOBILISATION IN SRI

LANKA

3.3.1 SAMURDHIBANKSOCIETIES (SBSS)

Samurdhi in Sanskrit means prosperity and the word was used as the name of a

government initiative to provide welfare services. The Samurdhi Authority of Sri Lanka

Act No. 30 of 1995 (as amended by Act No. 02 of 1997) provided for the setting up of

a Samurdhi Authority (as a corporate body with perpetual succession and the right to

sue and be sued) to implement the national Samurdhi Programme for the improvement

of economic and social conditions of youth, women and disadvantaged groups of the

society. This was to be achieved through initiatives such as:

(a) Broadening opportunities for employment and enhancing income;

(b) Integrating people into economic, development and social activities;

(c) Linking family-level economic activities with community development projects at

village, district, divisional and provincial levels;

(d) Mobilising peoples participation in the planning and management of projects and

schemes for their up-liftment;

The Central Bank is

responsible for investigating into the

affairs of institutions, which are allegedly

engaged in finance business without legal

authority. These unauthorised institutions

may be taking money from the public

either as deposits or in a manner akin to

deposits by calling them other names, such

as investments, credit, borrowings or

placements. Due to various notorious

incidents of fly-by-night operators and

failure of financial institutions, the

Central Bank has taken actions for

curbing unauthorised persons for

accepting deposits and for spreading

awareness among the masses.

www.microfinance.lk/pdf/1260785911.pdf


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(e) Fostering cooperation, promoting savings and assisting people to obtain credit

facilities;

(f) Facilitating the delivery of inputs and services from government departments, publiccorporations, local authorities, private sector organisations and non-governmental

organisations to beneficiaries of the programme;

(g) Implementing programmes and initiatives taken by the government for poverty

alleviation.

The Samurdhi structure consists of a decentralised system operating at division and district

levels. To manage and operate savings and credit schemes for beneficiaries under the

Samurdhi Programme, committees are formed at the village level, centres at the village-

cluster level and Samurdhi Balakayas or a youth force is created to implement all the

Samurdhi programmes. The Samurdhi centres andBalakayas are responsible for setting

up ground-level credit and banking facilities in conjunction with banks and other lending

institutions, and deposit mobilisation for constituents of their respective Grama Niladhari

divisions. The divisions are also empowered to plan and undertake infrastructure projects

for the development of their villages.

The activities of the Samurdhi Authority are financed by a fund set aside under the

Samurdhi Authority Act, for which money is allocated by the Parliament through funds

received by way of gifts, grants, donations, etc.; as income from any property owned or

administered by the Authority or money received by the Authority from any other source.

3.3.2 CO-OPERATIVES25

The Department of Co-operative Development is

responsible for the supervision and governance of co-

operatives registered under The Co-operative Societies

Law No. 5 of 1972 (as amended by Act Nos. 5 of 1972, 37

of 1974, 11 of 1980, 32 of 1983 and 11 of 1992). The Co-

operative Societies Law allows registration of societies

working on principles of a co-operative for economic,

social or cultural welfare of its members. The societies

registered can be with or without limited liability.

The law also states that a registered co-operative societyis only entitled to give loans or accept deposits from

members or other registered societies (with approval of

the Registrar of Co-operative Societies).

Co-operatives may receive loans or deposits from non-

members only to the extent and under conditions explicitly

allowed by the law. The two major forms of co-operatives

25 GTZ Study on Microfinance Institutions in Sri Lanka-2009

Societies Ordinance

The Societies Ordinance No. 16 of 1891 (as amended) makes provi-

sion for the registration of mutual, provident and other societies. As

per the Societies Ordinance, the following societies may be

registered:

(a) Societies established with the object of promoting thrift,

giving relief to members in times of sickness and distress, of aiding

them when in pecuniary difficulties and for making provision for

their widows and orphans;

(b) Societies for any purpose which the Minister, by notification in

Gazette, has authorised as a purpose for which the powers and

facilities of the Ordinance ought to be extended etc) (specially

authorised societies)

-Adapted from Legal Study of microfinance sector of Sri Lanka

(A GTZ study) www.microfinance.lk/pdf/1260785911.pdf


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active in the microdeposit mobilisation space are the co-operative rural banks and the

thrift and credit co-operative societies.

(i) Co-operative Rural Banks (CRBs)

CRBs owned by multi-purpose co-operative societies (MPCSs) are the second major

players in the semi-formal sector dealing with rural finance. Many co-operative credit

societies were formed by the government in the early decades of the 20 th century

against the framework of the Co-operative Credit Societies Ordinance No.7 of 1911.

Subsequently, during World War-II, consumer co-operative societies were formed to

facilitate food distribution. In the post-war period of the 1950s, these co-operatives were

renamed multi-purpose co-operative societies and their scope of activities was widened.

The MPCSs offer microfinance services through the CRBs, which are owned by them.

These activities also cover womens development co-operative societies (WDCS). The

umbrella institution for the WDCS was incorporated in 1991 as a district society and in

1998 upgraded to national level.

Multi-purpose co-operative societies are member-owned organisations and operations

are co-ordinated by the Board of Directors at the divisional secretariat level. In addition

to this general representative body, each MPCS has its own board, which is responsible

for all operations of MPCSs and CRBs owned by it. In addition to this, there is a bank

union at the provincial-level which handles investment activities for MPCSs.

(ii) Thrift and Credit Co-operatives (TCCSs) - SANASA

SANASA, a Sinhalese acronym for a financial co-operatives network, is a network of

thrift and credit co-operative societies (TCCSs). These co-operatives were introduced

by the British colonial administration and were the first credit co-operatives to be setup in Sri Lanka. The TCCSs gradually became involved in a wider set of roles for

procurement of inputs and distribution of products on behalf of the co-operatives by the

1930s. This function was subsequently taken over by the multi-purpose co-operative

societies (MPCSs). During the 1970s, the TCCSs were in decline and the Department

of Co-operatives was to wind up operations and close the remaining societies. However,

under the leadership of P.A. Kiriwandeniya, the movement was revived and reorganised

under the SANASA banner in the late 1970s. During the revival and reorganisation,

the mission and vision of the SANASA movement was more precisely defined and the

social dimension of the programme gained importance. The network orientated its focus

towards poverty alleviation and started to increasingly target low-income groups at the

village level. The PTCCSs network under SANASA has grown from 1,500 societies at

the beginning of the 1980s to 8,440 registered PTCCSs in 2007. Only about one-third of

these are now active.

Organisational reforms were undertaken between 1978 and 1980 whereby the first

seven district unions (DUs) were established (at present the number stands at 34)

which subsequently united to form a national federation, giving SANASA its present

three-tier structure. SANASA societies are regulated under the Co-operative Societies

Law of 1972 (details provided above) and also the Societies Ordinance of 1891. PTCCSs

CRBs suffer from poor

management and governance. Though

the numbers (of savings deposits)

quoted by them are high, the actual

number may be less as this money is

misused by giving loans in a inappro-

priate manner or the deposits are put

into other economic activities of the

co-operatives which are not financially

sustainable. So, there is a loss of the

savings and no one is aware of this.

-Dr. Nimal. A. Fernando

Former Principal Specialist

(Microfinance), ADB


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and DUs are registered and controlled by departmentsat the district-level, while the national federation

is registered and controlled at the national-level.PTCCSs are also legally permitted to provide savingsservices to minors and to adult non-members.26

The key responsibilities of the Department of Co-

operatives are:

Carrying out yearly audits of registered co-

operative societies;

Replacing the board with an interim board and

dissolving a troubled co-operative under certain

conditions, and;

Approving the expansion of a co-operatives

activities geographically and authorising a

merger.27

The Co-operatives Act is considered very restrictive by experts and is deemed responsible

for some of the problems TCCSs are facing, including:28

The requirement of permission for geographical expansion restricts the consolidation

of TCCS. The Department of Co-operatives treats TCCSs as village-level institutions.

The Department of Co-operatives does not have the capacity to carry out proper

audits, this has resulted in financial weaknesses with the TCCSs.

There are no prudential norms prescribed for regulating the TCCSs at national level.

This has resulted in variations in the regulations at district level.

3.3.3 Non-Government Organisations - Microfinance Institutions (NGO-MFIs)

According to regulations, non-government voluntary social service organisations have

two options:

1. Register under the provisions of the Voluntary Social Service Organisations

Act No. 31 of 1980, amended by Act No. 8 of 1998. The Circular Letter

of the secretary to the President, dated 26/2/1999, establishes that:

a) International voluntary social service organisations and national ones

operating with foreign funding or in more than one administrative district,

have to register with the National Secretariat for NGOs under theMinistry

of Social Services.

26 Owen, Graham Rural Outreach and Financial Co-operatives : Sanasa, Sri Lanka, IBRD, 2007

27 Ibid.

28 Ibid.

Grass Root

Level - Tier I

NationalFederation

CASH AT

LOCAL BRANCH

BANK ACCOUNT

District UnionRegional UnionDistrict Union

PCTTS

PTCCSPTCCSPTCCSPTCCS PTCCS

Secondary

Level - Tier II

National

Level - Tier III

NationalFederation

Figure 16


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b) Local NGOs operating in only one district are to register with the district

or divisional secretary.

2. On the other hand, non-profit organisations can also be registered under

Section 21 of the Companies Act No. 17 of 1982. With the enactment of the

new Companies Act No. 7 of 2007, companies registered under the old Act have

to re-register with the Registrar of Companies.

NGO-MFIs under the present regulations (either the Voluntary Social Service

Organisations Act or Companies Act) are not allowed to mobilise deposits

from their clients. However, in August 2010, the Central Bank issued a new

Microfinance Regulations Draft for discussion and feedback of industry experts

and stakeholders. The Microfinance Bill was tabled in Parliament in 2010.

Highlights of Microfinance Draft

The Central Bank of Sri Lanka released a draft of Microfinance Act in July 2010. Highlights of the draft include:

> As per the Act, microfinance business means accepting deposits and providing financial accommodation in

any form and other financial services, mainly to low-income persons and microenterprises.(This clearly

indicates that MFIs registered will be allowed to accept deposits, regarding which there is ambiguity at present).

> The Act provides for establishing an authority for licensing, regulating and supervising microfinance business

and matters incidental to the same.

> This authority will be governed by a Board of Directors having representation from the Central Bank, the

Ministry of Finance and professional accounting body and two people with relevant qualification and experience.

> The Act shall be applicable to companies, non-governmental organizations, societies and co-operative societies,

carrying out microfinance business. (Licensed banks, registered finance companies, Samurdhi and farmer

organisations have been left out).

> The authority will decide the core capital requirementfrom time to time and this is one of the eligibility criteria

for registering as a microfinance service provider.

> The authority shall specify the operational area and regulations for the institutions during their registration.

> The Act defines the constitution, roles and responsibilities of the Board of the registered institution.

> The Act defines the accounting and reporting requirements for MFIs governed under it.

> The authority may take action to safeguard interests of the depositors through deposit insurance as the

authority deems necessary.

> The Act defines the terms and conditions under which deposits may be accepted by such microfinance institutions,

the maximum rates of interest payable on such deposits, the maximum period for which deposits may be accepted

and the maximum amount that may be depositedwith a microfinance institution in the name of one person in one

or more accounts.

- Based on the draft issued by the Central Bank of Sri Lanka

http://www.cbsl.gov.lk/pics_n_docs/09_lr/_docs/directions/nbsf/Draft_microfi_act.pdf

There has been

benign neglectof the

sector by authorities in the

past.

J. Charitha Ratwatte

MD Sri Lanka Business Deve-

lopment Centre SLBDC, Former

Secretary, Ministry of Finance


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3.4 INFORMAL MECHANISMS FOR DEPOSIT MOBILISATION

ince informal institutions are not regulated, by definition there is no legal framework or

set of regulations under which they are managed. The most commonly used informal

mechanism in Sri Lanka is Seettus (the local name for RoSCAs), kitchen savings andpiggy banks. These informal mechanisms are discussed in Section 4.4.

3.5 INSURANCE COMPANIES

The Regulation of Insurance Industry Act, No. 43 of 200029

The Insurance Board of Sri Lanka was established under The Regulation of Insurance

Industry Act, No. 43 of 2000. The Act is responsible for regulation and supervision of

insurance activities. Insurance brokerage firms are required to register with the Insurance

Board. Currently, there are 16 companies licensed under this Act and there is also

a network of insurance agents, appointed and registered by insurance companies and

insurance brokers, who play a key role in marketing insurance products.

The Insurance Board of Sri Lanka (IBSL)has been empowered to:

Register as insurers persons carrying on insurance business (general, long-term or

both);

Register persons as insurance brokers;

Advise the government on the development and regulation of the insurance industry;

and

Regulate business activities and affairs of registered insurers and insurance brokers.

3.5.1 SPECIAL RESTRICTIONS

Only a public company incorporated in Sri Lanka can seek registration for carryingout insurance business;

A registered insurer shall not carry on any form of business other than insurance,

provided that a person may, with the written approval of the IBSL, carry out any

financial service business which is ancillary or associated with the registered

insurance business of such person.

3.5.2 REGISTRATIONOFINSURERS30AND REGULATIONS GOVERNING INSURANCE

The Insurance Act details all the requirements that a company must fulfil in order to

become registered under the Act. Some of the key provisions are:

Minimum capital of LKR 25 million (USD 258,000) is required in order to conduct

long-term (life) insurance business, and LKR 50 million (USD 515,000) in order to

conduct general insurance business;

29 Conducive Environment - Role of Governments and Regulators by Sirisena S. Ratnayake30 http://www.ibsl.gov.lk/insurance_legislations/insurance_act.pdf


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Only limited (share) companies are allowed;

Composite companies (doing both general and life business) are permitted;

A qualified actuary must evaluate the funds annually;

A minimum solvency margin in the long-term business of 5% of the actuarial value of

liabilities is required (minimum solvency provisions for general insurance business

are under discussion but not yet agreed upon);

Insurance companies (only once) and brokers (annually) must be registered;

Insurance companies may conduct only insurance business;

Insurance agents are appointed by insurance companies or brokers and must bephysical persons;

30% of the long-term funds of a life insurance business and 20% of technical reserves

of general insurance must be invested in government securities and the balance in

other investments as determined by the IBSL;

Fire and workmens compensation insurance are still subject to tariffs, but the motor

insurance tariff was deregulated as on January 1, 2002;

The Agriculture and Agrarian Insurance Board, the Export Credit Insurance

Corporation and the Social Security Board are all exempted, and instead subject tospecial Acts in each respective area.

3.6 THE ROLE OF GOVERNMENT OF SRI LANKA IN DEPOSIT MOBILISATION

3.6.1 GOVERNMENTALINITIATIVESTOIMPROVEFINANCIALINCLUSION

3.6.1.1 The National Development Trust Fund (formerly the Janasaviya Trust Fund)

The National Development Trust Fund (NDTF) was established in January 1991 by

the Government of Sri Lanka in a loan agreement with the World Bank and Federal

Republic of Germany, amounting to USD 52.8 million. The objective was to identify,

develop, catalyse and promote sustainable income generating opportunities and a

higher quality of life for the poor through a range of activities, including productiveself-employment, microenterprise and rural work.

The NDTF provides lines of credit and support services to the poor, generally through

partner organisations such as peoples organisations, non-government organisations

and co-operatives by promoting thrift, savings and an asset base amongst the poor,

leading to self-reliant development. This mandate by the NDTF led to the growth of

NGO-MFIs in the second half of the 1990s. The NDTF is the biggest wholesale lender

for microfinance institutions in Sri Lanka.

NDTF aims to increase the

number of partner organisations to

600 and help NDFT borrowers in

reaching a per capita income of USD

5,000 by the end of 2016.

http://www.treasury.gov.lk/NDTF/

Future%20Plan.htm


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The NDTF was formally known as the Janasaviya Trust Fund (JTF) programme. The

operations manual of the programme specified compulsory deposit mobilisation through a

percentage deduction of each loan disbursed. This sum was credited to the savings accountcalled a Group Contingency Fund, owned and managed by a group of sub-borrowers. The

manual alsospecifies general savings mobilisation wherein the beneficiaries are required

to participate in individual savings programmes. The savings mobilised must be deposited

on behalf of beneficiaries in an interest earning account in approved financial institutions.

(ii) Poverty Alleviation Microfinance Project (PAMP I and II)

The PAMP projects were initiated by the Sri Lankan Government with support from

the Japan Bank of International Cooperation (JBIC) to establish a cost-effective and

sustainable microcredit delivery system for the poor and inculcate of habits of savings and

thrift. The programmes are currently implemented through the Regional Development

Department (RDD) of the Central Bank. PAMP I started on December 1, 1999, and

continued until December 1, 2006, and PAMP II commenced in 2009 and will continueuntil 2013.

3.6.1.2 Specification of the PAMP Project

Consists of four major components: credit, training, technical assistance and project

administration.

Short-term and medium-term credit is provided to eligible individuals for agriculture

and non-agriculture microenterprise.

Facilitation is carried out through the appointment of participating agencies, whichfunction asDeposit Taking Entities.

The participating agency must be an organisation registered under the Societies

Ordinance or the Companies Act, with a minimum experience of two years, on-time

repayment record of over 85% and also be active in small group formation, savings

and microcredit.

3.6.2 INITIATIVESBYINSTITUTIONS(SUPPORTEDBYGOVERNMENTOROTHERWISE) INMICROENTERPRISE

DEVELOPMENT31

(i) Government Using Banks as a Channel to Fulfil its Objective of Achieving SocialWelfare

Governments often use financial institutions as channels to direct their own programmes

with the objective of achieving social welfare and microenterprise development. The

Samurdhi Development Credit Scheme (SDCS), developed by the Ministry of Rural

Development in Sri Lanka, has used two state-owned commercial banksPeoples Bank

and Bank of Ceylonto distribute approximately LKR 500 million (USD 6 million).

This scheme was intended to serve the rural community through village-level task forces

called Samurdhi Task Forces, which operated as social intermediaries. The task force

used its members called SamurdhiNiyamaka to select recipients of the subsidised loans

31 http://www.bangladesh-bank.org/seminar/cpsrilanka.html

Governments often

use financial institutions as

channels to direct their own

programmes with the objective

of achieving social welfare and

microenterprise development.


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ranging from LKR 2,500 to LKR 10,000 (approximately USD 22 to USD 88). The

Samurdhi programme is largest microfinance programme in terms of outreach. (Also

refer to Section 4.1.5)

(ii) Commercial Banks Focus on Microfinance for Microentrepreneurs

The Hatton National Bank (HNB) in Sri Lanka uses the concept of the Barefoot

Banker to set up a number of village-level schemes (Gami Pubuduwa or village

awakening) to distribute loans. The village-level officers or village awakening

advisors function as intermediaries between the bank and rural entrepreneurs. Loans

up to LKR 15,000 (USD 165) can be approved without formal collateral and this

amount can increase to LKR 25,000 (USD 221) if the applicant is guaranteed by

two villagers. The interest rate on loans ranges from 17-25%per annum. In some

cases, NGOs are allowed to use deposits of its members in the bank to raise funds

for further development of microentrepreneurs. In addition to HNB, the six regional

development banks (RDBs) are also involved in disbursing loans to the rural poor.

(iii) Saving Products Through School Banking Units for Youth

The HNB and the NSB are two leading financial institutions in Sri Lanka that have

been recognised for their children and youth savings efforts. Until 2009, HNB ran

200 student banking units in 200 schools across the country through 180 branches.

For the last two decades, over 600,000 students have had a relationship with the HNB

through its network of student banking units and the bank holds savings deposits up

to nearly USD 40 million from these students.32 In addition, NSBs youth savings

program reached nearly 390,000 youth with a total savings of LKR 3.4 billion (USD

30 million) by the end of 2005.33 The NSB currently operates 344 school banking

units.34

3.7 PROTECTING THE CUSTOMERS: CONSUMER PROTECTION

MEASURES IN SRI LANKA

Bank Deposit Insurance Scheme

There are various client protection laws in Sri Lanka to safeguard consumers rights

while using goods and services (including financial services), such as the Consumer

Affairs Authority Act No. 09 of 2003 and various other related laws.35

A deposit insurance scheme has been in operation in Sri Lanka since 1987, but

participation in the scheme is only voluntary to licensed banks and registered co-

operative societies carrying out banking services.36 The Central Bank of Sri Lanka

had announced a new deposit insurance scheme in 2010. This scheme covers up toLKR 100,000 (USD 885 approximately) per depositor. This insurance coverage will

increase over time as the insurance fund grows.37

32 www.makingcents.com/.../HattonNational_Case%20StudyNo.1_September%202009.pdf

33 http://csd.wustl.edu/Publications/Documents/RP10-15.pdf

34 http://www.nsb.lk/Annual_Reports/Annual%20report%202009/data/supplementary/products.html

35 http://www.idpsrilanka.lk/html/SpecialProgrammes/DisasterResponse/Laws%20Related%20to%20Consumer%20

Protection%202008.pdf

36 http://www.cbsl.gov.lk/pics_n_docs/10_pub/_docs/pa/booklet/bl_2.pdf

37 http://www.lankabusinessonline.com/fullstory.php?nid=1392433552

A misconception exists

that as supervisor and regulator, the

Central Bank guarantees the safety of

all deposits and other investments of

the public. It is the responsibility of

the public to exercise utmost care and

vigilance over the true affairs of the

institutions in which they place

deposits and other investments

-CBSL Guide to Financial Services

http://www.cbsl.gov.lk/pics_n_docs/10_

pub/_docs/pa/booklet/bl_2.pdf

Deposit insurance can be

in two forms: implicit deposit insurance,

where there are no stated rules but

depositors have assurances implied by

governments action either through

precedence or stated intention; and under

explicit deposit protection, where the

terms and conditions of the scheme are

explicitly stated in a statute. The scheme

provides a legally enforceable guarantee

on all, or a portion of the principal, and in

some cases the interest, on a deposit.

http://www.jdic.org/depositinsuranceschemes.htm


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The Financial Ombudsman Sri Lanka38

The Financial Ombudsman Scheme commenced operation in December 2003 as a

voluntary disputes resolution mechanism, but was restricted to banking industry.Later, the scheme was extended to registered finance companies and leasing

companies. Currently only those financial institutions that are licensed by the Central

Bank can be members of the scheme.

3.8 EDUCATING CUSTOMERS: FINANCIAL AWARENESS /LITERACY

CAMPAIGNS

Due to scandals in Sri Lanka over the past few years, such as with the Golden

Key credit card company, with unregulated deposit mobilisers like Sakvithis and

Danduwa Mudalalis and with other finance companies, lack of financial literacy and

awareness among clients has come to the fore. The Central Bank has been making

public announcements (both through print and electronic media) to spread awarenessamong the masses regarding institutions authorised to accept deposits and to inform

about other critical factors, such as interest rates, required documentation, etc. The

major government-run programmes, such as Samurdhi and PAMP-I and II, have

financial literacy as part of their agenda.

One admirable example of spreading financial literacy is the school banking initiative

by the HNB. The bank has spearheaded many initiatives towards inculcating

savings habits among the young generations by opening 154 school banking units

throughout the country. Many NGO-MFIs include awareness programmes related to

finance, health and sanitation, etc. as well.

3.9 PAYMENT SYSTEMS FOR BANKS

The Sri Lankan payments and settlements system (PSS) enables the transfer of

money in accounts of financial institutions to settle financial obligations between

individuals and institutions. The Central Bank of Sri Lanka is the authority

responsible for promoting safety, efficiency and stability of PSS, and supervision

through the Payment and Settlement Systems Act, No. 28 of 2005. The main

payment, clearing and settlement systems in Sri Lanka are:39

Cheque Imaging and Truncation System (CIT), the inter-bank cheque clearing

system operated by Lanka Clear Ltd.

Sri Lanka Inter-Bank Payment System (SLIPS) operated by Lanka Clear Ltd.

Lanka Settle, comprising the Real Time Gross Settlement System (RTGS) and

the Scrip-less Securities Settlement Systems (LankaSecure) operated by CBSL.

38 http://www.financialombudsman.lk/scheme.php

39 http://www.cbsl.gov.lk/htm/english/05_fss/f_1.html

The major issues are the

dominating role played by the two state

banks within the financial system of the

country; lack of financial literacy among

the people of Sri Lanka and lack of clear

directions from the government to the

financial market has hampered improving

efficiencies.

http://globip.com/pdf_pages/asiapacific-

vol1-article4.pdf

We are given training with

which we can map all our finances for a

year in the form of income, expense, and

credit. [It] helped my husband realise that

Rs 24,000 was spent on alcohol and less

amounts were spent on child savings. This

has changed him and he has started using

money prudently.

Lilawati

An MFI client on the benefits of

financial education


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In recent developments, the Central Bank of Sri Lanka has drafted guidelines

for mobile phone payment systems and called for public comments. Mobile

payments will be allowed through accounts in licensed banks and registeredfinance companies as well as custodian account-based systems operated by

non-bank service providers. Service providers can open e-money accounts for

customers and issue e-money by accepting physical money.40

3.10 BUILDING CAPACITIES OF INSTITUTIONS

The highest need for capacity building is within the semi-formal sector in Sri

Lanka. Though there are various players working in different capacities in this

area, like the NDTF, GTZ, Stromme Foundation, and ADB, to name a few, the

demand for capacity building is a lot higher than can be provided.

Networks: Lankan Microfinance Practitioners Association (LMFPA)The Microfinance Practitioners Association which started operating in 2006

with assistance from the GTZ and Plan Sri Lanka gave a major boost to the

sector and is the coordinating body for microfinance institutions in Sri Lanka.41

The network delivers training programmes and seminars, shares information,

and lobbies for the microfinance sector. Current membership includes 78 MFIs,

out of whom 10 are national-level players.

Specialised Training Facilities

There are a limited number of institutions which offer CGAP recognised courses

in microfinance, and all of them are concentrated in Colombo. ADB, through

its Rural Finance Sector Development Project, is currently assisting the Central

Banks Bank Training Institute become a credible one, but this has not broughtforward the results envisaged. SEEDS, Sanasa Development Bank and other

leading agencies, both private and public, also conduct training programmes in

the microfinance sector. Though limited progress has been made in this direction,

there are some encouraging initiatives, such as the University of Colombos six-

month Diploma Programme in Microfinance.

4. MICRODEPOSIT SERVICE PROVIDERS, PRODUCTS,METHODOLOGIES AND THEIR SCALABILITY

Sri Lankan providers of microfinance services and microdeposits, in particular,

have grown to represent an array of institution types. Indeed, Sri Lanka is oftencharacterised as one of South Asias more saturated markets in terms of outreach

of savings providers, as mentioned above. However, experts across the sector

agree that coverage is not as extensive as it may appear in the statistics, as

deposit accounts are more concentrated in the southern and western regions of

the country, and many middle-class households actually access multiple accounts

(implying double counting of the same household as deposit holders).

40 http://investsrilanka.blogspot.com/2010/08/sri-lanka-central-banks-guidelines-for.html

41 http://lankamicrofinance.com/index.htm

Department of Economics,

University of Colombo, commenced the

first-ever Diploma in Microfinance (DMF)

Programme in Sri Lanka on October 11,

2008. The programme involves govern-

ment and non-government organisations

in the field of microfinance

http://old.nabble.com/Devfinance:-Diploma-

in-Microfinance-td29482819.html


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The low-income populations, especially those in remote rural areas (such as the

plantation sector) and in the conflict-affected northern and eastern regions, have a

very limited access. Nevertheless, until recent clarifications were given by the CentralBank, microdeposit service providers included a wide range of formal, semi-formal

and informal institutions.

4.1 OUTREACH OF FINANCIAL SERVICES42

In 2009, the GTZ conducted a comprehensive study on the outreach of financial

services in Sri Lanka. According to the study, and despite the realities mentioned

above, outreach of financial services in Sri Lanka can be considered fairly extensive,

with a reported 82.5% of households having access to financial institutions for their

savings and credit needs. Furthermore, there is evidence of a strong savings culture

in Sri Lanka with nearly 75% of households having saved in a financial institution

(although many accounts are believed to be fairly inactive). However, the estate sectorhas relatively low levels of access (68.5%) compared to the rural and urban sectors in

the rest of the country. Furthermore, the northern, eastern and northwestern provinces

also display a lower savings rate of approximately 65%.

Figure 17(below) shows the difference in outreach of financial services among rural,

urban and estate sectors. The majority of the population resides in rural areas, and

so by volume, the greatest number of households accessing financial services is in

rural areas. The data reveals that in all financial sectors, savings is the dominant form

of financial service utilised. The third bar displays access to savings and/or credit

representing usage to financial services in at least one form.


49.5

74.282.5

40.2

78.284.6

30

68.574.6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Credit Savings Credit or Savings

Rural Urban Estate

Source: GTZ study on outreach of microfinance in Sri Lanka -2009

There is evidence of a strong

savings culture in Sri Lanka with nearly

75% of households having saved in a

financial institution (although many

accounts are believed to be fairly inactive).

However, the estate sector has relatively

low levels of access (68.5%) compared to

the rural and urban sectors in the rest of

the country.

Figure 17: Outreach of Financial Services (% of Total Population)


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There is a large variance in household access to financial services across geographies.

Figure 18 indicates the distribution of bank outlets in the nine provinces. The districts

with high outreach include Matale (95.8%) in central province, Matara (97.5%) insouthern province, Polonnaruwa (98.3%) in north central province and even Jaffna

(91.3%) in northern province, whereas lower access is evident in Puttalam (67.5%) in

western province, Vavunia (66.7%) in northern province and Trincomalee (60.7%) in the

eastern province.43 This may be partially due to the latter being in the relatively poor,

conflict-affected regions of the north and northeast. Figure 19 indicates the number of

households being served by each outlet on an average across the nine provinces.

Another useful proxy for the relative household access to financial services is the number

of financial institutions accessed by households. In terms of savings, the central and north

central regions enjoy the most access to different providers, each with more than 50% of

households accessing two or more institutions just to meet savings needs. Meanwhile, the

northern and eastern regions lag behind, with less than 20% of all households surveyedaccessing two or more institutions for savings, although 80% have at least accessed one

such institution as indicated in theFigure 17.

4.2 FORMAL INSTITUTIONSIn Sri Lanka, the range of formal financial institutions include: commercial banks, finance

and leasing companies, and development banks. However, commercial banks, both state-

owned and private, play a dominant role in the provision of financial services and savings

in particular. Formal financial institutions, which are regulated by the CBSL, presently

mobilise 95.5% of the total deposits in the country. In terms of gender, males tend to

access formal banks (state, private and regional) more than females.

43 GTZ.s study - Outreach of Financial Services in Sri Lanka. 2008

1,653

676

738

303399

549

444

366

488

0 500 1000 1500 2000

Western

Central

Southern

NorthernEastern

North Western

North Central

Uva

Sabaragamuwa

Number of Outlets

3,517

3,935

3,347

3,9173,857

4,226

2,759

3,577

3,947

0 1000 2000 3000 4000 5000

Western

Central

Southern

NorthernEastern

North Western

North Central

Uva

Sabaragamuwa

Population per Outlet

Source: http://www.cbsl.gov.lk/htm/english/08_stat/s_6.html Source: http://www.cbsl.gov.lk/htm/english/08_stat/s_6.html

Figure 18: Density of Bank Outlets Figure 19: Households per Bank Outlet


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4.2.1 LICENSED COMMERCIAL BANKS(LCBS)

Table 6: Branches, Total Deposits and Share of Deposits for LCBs

Commercial Banks 2005 2006 2007 2008 2009No. of Branches 1,627 1,737 1,934 2,071 2,214

Total Deposits

LKR (USD) Million

945,575

(USD 8,368)

1,121,403

(USD 9,924)

1,307,362

(USD 11,570)

1,410,568

(USD 12,483)

1,704,700

(USD 15,086)

Share of Total Deposits 75.59% 76.37% 76.63% 75.49% 75.61%


State Banks

In Sri Lanka, state banks play a big role in the provision of savings accounts to low-

income clients among formal providers. As seen in Table 6, according to GTZs study on

the Outreach of Financial Services in Sri Lanka, 2008, about 75% of households have

deposits saved with state banks.44

Among these, Peoples Bank and Bank of Ceylon are thetwo most dominant institutions in terms of scale and outreach. State banks have relatively

equal penetration in urban, rural and estate sectors. They are generally considered to be

trustworthy and operate primarily through a branch network and branch-based staff.

Private Banks

Domestic private banks, meanwhile, are also a key source of savings services in

Sri Lanka, particularly among urban and more affluent households who enjoy

greater proximity a